MARKET COMMENT: FTSE 100 Closes Up But Underperforms Smaller Peers

LONDON (Alliance News) - The FTSE 100 closed marginally higher Thursday, but it underperformed its smaller peers as a poor performance by banking stocks Barclays and Standard Chartered offset the gains made by stocks related to the housing sector.

A disappointing trading update from Standard Chartered after the market open resulted in the bank's shares falling sharply and the FTSE 100 moving into the red, where it remained for most of the trading session.

The bank, which is London-listed but makes the bulk of its earnings in emerging markets, said that it expects its first-half operating profit to be down by about 20%, hit by a poor performance in its financial markets business. It also expects its first-half income to be down by a mid-single-digit percentage from a year before, hit by an increase in loan impairments and as tough trading in India, Korea and Singapore offsets income growth in China and Africa.

"This has been a disappointing first half, with difficult trading conditions, particularly in financial markets," Chief Executive Peter Sands said in a statement.

Standard Chartered ended the day as the second-biggest faller in the FTSE 100, closing down 4.3%.

Barclays, closing down 6.5%, was the index's heaviest faller. Shares in the bank plummeted after New York state's top law enforcer late Wednesday filed fraud charges against it over its dark pool, LX Liquidity Cross, alleging that the bank has favoured high-frequency traders at the expense of other investors.

Eric Schneiderman, the state attorney-general, accused Barclays of demonstrating a "disturbing disregard" for its investors in a "systematic pattern of fraud and deceit". The complaint alleges that Barclays has actively sought to attract high-frequency traders by giving them "systematic advantages" over others trading in its own dark pool.

The complaint alleges that Barclays falsified marketing material purporting to show the extent and type of high frequency trading in its dark pool.

The sharp falls in both companies meant the FTSE 350 banking sector index ended the day down 2%, making it the biggest declining sector index.

A late rally ensured that the FTSE 100 closed a touch higher at 6,735.12, but that compared with a 1.3% rise for the FTSE 250 to 15,646.83, while the AIM All-Share index closed up 0.3% at 780.29.

"Housebuilders helped the FTSE 250 to establish a clear ascendancy over its bigger brother this afternoon, after Mark Carney opted not to impose draconian limits on mortgage lending," said Chris Beauchamp, a market analyst at IG.

UK housebuilding stocks jumped after the Bank of England made only very limited new recommendations to control the buoyant housing market, saying that household indebtedness currently poses no imminent threat to the country's economic stability.

Analysts had feared that the central bank could take big steps to try and calm the housing market, which has seen accelerating growth in prices since the start of last year, leading to concerns that the market in London and the southeast may be overheating. There have been signs of a slowdown in the rapid growth rates in the last few weeks, partly because new rules recently introduced have already forced banks to tighten mortgage lending conditions.

However, the Bank of England Thursday recommended that mortgage lenders limit the proportion of mortgages at loan-to-income multiples of 4.5 and above to no more than 15% of their new mortgages. It also said mortgage lenders should apply an interest rate stress test that assesses whether borrowers could still afford their mortgages if the bank rate were to be 3 percentage points higher than the prevailing rate during first five years of the loan.

The recommendations, which are effectively rules for the lenders, come into effect on October 1.

Though the household indebtedness currently pose no imminent threat to stability it is "prudent to insure against the risk of a marked loosening in underwriting standards and a further significant rise in the number of highly indebted households," the BoE said in its semi-annual Financial Stability Report.

"The Bank of England is gently stepping on the brakes to prevent the housing market from going into dangerous overdrive," said Christian Schulz, senior economist at Berenberg. "The steps announced by the Financial Policy Committee today... are likely to slow down modestly the housing market, without derailing it," he said.

In the FTSE 250, Redrow closed up 6.5%, Foxtons Group closed up 6.5%, Galliford Try closed up 5.7%, Countrywide closed up 5.2%, Taylor Wimpey closed up 5.2%, Bovis Homes closed up 5.0%, and Bellway closed up 3.9%. Meanwhile, FTSE 100-listed Persimmon closed up 4.0%, Barratt Developments closed up 0.5%, and Travis Perkins closed up 2.7%.

The pound received a boost in the immediate aftermath of the stability report, but has since pared some of the gains. At the UK equity market close, sterling trades at USD1.7012, EUR1.2496, CHF1.5194, and JPY172.843.

The London Stock Exchange Group ended the day as the biggest riser in the FTSE 100, closing up 6.1%. The group has now agreed to acquire Russell Investments from Northwestern Mutual for USD2.70 billion in cash, a deal that will bring together USD5.2 trillion of assets benchmarked to Russell indexes with an estimated USD4.0 trillion of equities benchmarked to FTSE indexes and expand the LSE's scope in the US.

Chief Executive Xavier Rolet said the acquisition of Russell represents a significant milestone for the group.

Bwin.Party Digital Entertainment, closing up 3.6%, was another big riser in the FTSE 250 Thursday. The online gambling company denied a Bloomberg report that the company is considering selling some or all of the company as part of a strategic review. Bwin.Party said it has no plans to break-up or sell the company.

DS Smith, closing down 1.1%, was one of the mid-cap index's biggest losers, even though it said its full-year pretax profit more than doubled as revenues rose on organic growth and the first 12 month contribution from the SCA Packaging business it acquired in 2012.

However, the company warned that it still expects a "difficult consumer economic environment to remain", and, when combined with negative forex impacts, this could potentially lead to 2015 full-year earnings per share downgrades of 1% to 3%, says Justin Jordan, an analyst at Jefferies. The analyst also pointed out that DS Smith currently trades on a price-to-earnings ratio of 13.1 times forecast 2014 calendar year earnings, which represents a 10% to 20% premium to its European packaging peers.

Imagination Technologies Group, ended down 5.1%, the second-biggest faller on the mid-cap index, after its biggest shareholder Intel Capital Corporation said it would sell a 9% stake in the firm

UK Stocks dropped significantly, before quickly recovering, around the time of the US equity market open, following comments made by President of the St. Louis Federal Reserve James Bullard that sparked fears that a US interest rate hike may come sooner than currently anticipated.

US jobs growth is "way ahead of schedule," and most data suggest the economy is getting stronger, Reuters quoted Bullard as saying on the Fox Business Network Thursday. "I think it's an aberration. I would throw it out at this point; I think the economy actually looks pretty good" Bullard said of recent data that showed a steeper-than-expected plunge in first-quarter US GDP growth.

US and European equities, however, have struggled to rebound from the comments. On Wall Street, at the UK equity market close, the DJIA, NASDAQ Composite, and S&P 500 are all down around 0.5%.

In Europe, the CAC 40 in Paris has closed down 0.5%, while the DAX 30 in Frankfurt has closed down 0.6%.

In the data calendar Friday, French consumer spending, producer price, and first quarter gross domestic product data are released at 0745 BST, with Italian business confidence information due at 0900 BST.

UK current account and business investment data are published at 0930 BST, alongside the third and final reading of first quarter UK GDP. Eurozone consumer confidence, business climate, industrial confidence, and services sentiment information is scheduled to be released at 1000 BST. The preliminary reading of German consumer price inflation is at 1300 BST.

In the US, the Reuters/Michigan consumer sentiment index is released at 1455 BST.

In the corporate calendar, FTSE 250-listed Howden Joinery Group releases half-year results, while Keller Group, Serco Group, and Berendsen release trading updates.

By James Kemp; jameskemp@alliancenews.com; @jamespkemp

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